In 1978, The Airline Deregulation Act was purposed and signed by President Jimmy Carter. This federal law came into existence for two main reasons; stated by Carter (1978), “to help our fight against inflation, and to ensure American citizens of an opportunity for low-priced air transportation. Today’s motives in the airline industry go way beyond economic decisions for themselves as well as their shareholders. Nowadays, businesses are an essential part of society and the airline industry must exceed their compliance of legislation and obligations of what is expected of them and focus on the interests of society.
In doing so, they must perform corporate social responsibility that will help improve the community, society’s youth, charity, education, and also our planet. This corporate social responsibility should not be an option but rather an obligation, as that they play an essential role in creating goodwill, a positive image, and a competitive edge for the industry. Corporate social responsibility also increases sustainability by assisting the industry in achieving its goals and increasing long-term shareholder value.
One company that exhibits this corporate social responsibility is JetBlue. They are dedicated to serving the needs of America’s youth as well as their community. Ian Deason, the director of airport operations, stated that “Flying is our core business… our core values include caring, integrity and passion. ” The company will continue to demonstrate their corporate social responsibility in April 2013 by hosting their third annual “Wings for Autism” event at their Boston Logan International Airport location.
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The program is designed to introduce the possibility of flight travel to children with autism and give their families an opportunity to practice the boarding process, become familiar with the plane, and interact with the pilots and crewmembers. Crewmembers will team up with autism experts at The Charles River Center, where they will be trained to exemplify the expected and unexpected needs of families with children who are autistic. Since the program started in 2010, more than 400 families in the Boston area have been able to participate in the program which the company plans on providing to other cities in the near future (McFadden).
JetBlue also partners with many nonprofit organizations. One in particular is KaBOOM, an organization that constructs innovative kid inspired playground areas for communities. This past March, following the occurrence of Hurricane Sandy the partnership hosted a design day in the Sandy impacted city of Long Beach, NY in which children were able to sit down with team members and assist in the design of a playground that will be constructed there in May of 2013.
JetBlue plans to expand this program to other affected cites and since their partnership with KaBOOM in 2006 they have helped build a total of 13 playgrounds, engaged 2,636 volunteers and provided a safe place for children to play in cities across the airline’s network (BlueTales). Moreover, JetBlue isn’t the only airline that is signifying their corporate social responsibly to the community. Transaero, an airline company in Russia implements many charitable programs. In 2012, the company’s corporate social responsibility program made the top three in Russia and they were also assigned the top AAA(s) corporate social responsibility rating.
Transaero supports children with cancer as well as their families. They offer camps where children can receive medical and psychological rehabilitation and also fund a year round facility in Moscow, where children and their parents can receive legal aid. With cancer treatments and airfare being rather expensive, the company offers free flights to Moscow, St. Petersburg or even abroad so that the children can receive their needed treatment. Also many of the airlines employees are regular blood donors and make regular visits to hospitals and cancer centers to visit with sick children.
Olga Pleshakova, the company’s CEO stated that “volunteering is not just about the company’s social responsibility program, but is an integral part of its HR policy that allows employees to show their best sides and develop their potential…the social initiatives of employees should be met with understanding and support by management” (Tveritina). Oman Air and AirBus are two other foreign airline companies. Both are committed to inspire and educate today’s youth by providing them with an appreciation for science and technology. The two airlines joined forces back in March of 2013 and created “The Little Engineer” workshop.
The workshops were conducted at Sultan Private School and Azzan Bin Qais International School in Oman and gave young Omani students a first-hand look into the world of engineering and encouraged them to pursue a future career in aviation. (Awal). Furthermore, as mentioned above the airline industry can safeguard our planet by exercising their corporate social responsibility by “going green”. Air France-KLM is one company in particular that focuses on this issue. For eight consecutive years the Dow Jones Sustainability Index has ranked Air France-KLM transport leader in terms of sustainable development in the airline sector.
This merit is awarded to 19 of the most responsible companies in the world, each in their own area of activity. Air France’s environmental efforts reduce 400 tons of waste each year (Amstelveen). Air France reduces environmental wastes by recycling old uniforms as well as 80% of inflight articles. An environmental and social approach was used in designing their new inflight, reusable headphones. After a flight, the recovered headphones are cleaned and repackaged by a company that now employs 50 additional disabled workers thanks to the efforts of Air France.
Also, with pollution being a huge issue in the aviation industry Air France is conducting research with experts to create more sustainable biofuels that will cut down on carbon dioxide emissions and provide a more fruitful planet for society (The Financial). Additionally, the airline industry has been global before anyone even considered globalization. According to the article “The Airlines Global Dilemma”, international travel has been around since the early 1900s. Chalks Ocean Airways had routine trips to the Bahamas and Pam Am had international routes to countries such as China, Japan, and Philippines in the 1930s.
International flights are the airlines best chance to make a profit as well because international flights have the most margins. “The Airlines Global Dilemma” article also highlights one key aspect to the globalization of this particular industry and is unlike any other industry, for the traditional airlines, globalization is not an opportunity, but the gravest threat. The reason for this is partially laws, environmental uncertainty and complexity. In the United States, there is a restriction on how much equity can be held by a non-American.
The government keeps it at 25% and the United States is not the only country that does this. There are many different laws of that the airlines have to deal with. European laws are the only laws that favor cross border mergers. Mergers for airline companies make a lot of sense business wise if they can be done. If a merger is not possible, many companies do route-by-route joint ventures. The main reason to do a joint venture is to gain access to areas that companies are weak. Joint ventures are service agreements where on specific routes the companies share costs and profits. The joint ventures tend to be harder for he bigger companies to produce but it is a very good way for smaller companies to stay competitive. Through multi-lateral communication, groups of smaller international companies can almost act as a virtual airline itself. The airline market also has many threats. There is the threat of new entrants and threats of substitution that American airlines have to deal with. The air space is getting very crowded for the American airlines so the threat of new entrants is very real. There are many companies that are entering the market with many strategies. Poland’s international airline is an example of company with a differentiation strategy.
They are the first airline in Europe to have Boeing’s new 787 according to AirGuide Business. The 787 Dreamliner is supposed to be more fuel efficient and more comfortable for passengers compared to older plane designs. There are also companies from the Middle East with strong growth strategies and a distinct competitive advantage. The new airlines from the Middle East are capitalized with government funds, running virtually tax free, equipped with new fleets operating out of new airports, are non-union, and offer top notch service according to Airlines Global Dilemma.
The airlines in the United States also have strong completion from within by low cost strategy companies. The threat of substitution is most prevalent by companies like Delta-Northwest and United-Continental. American Airlines is a great example of a company currently in Chapter 11 which needs to restructure, cut labor costs, and merge with US Airways. According to an article in Time Magazine, American Airlines labor cost was 4. 4 cents, Delta 3. 4 cents, and United 3. 7 cents per available seat mile.
That difference results in billions of dollars and probably contributed to American Airlines’ two billion dollars in loss last year. According to Fortune, the merger should eliminate 1. 25 billion in labor costs. Not only do the airline carriers have to deal with globalization but also have deal with airplane makers. Boeing, for instance, has a very different problem than companies like American Airlines and Delta. Boeing has too many orders to fill which could possibly give this supplier stronger bargaining power. Boeing owes it buyers 2845 planes and is only building 35 planes per onth. At that rate, it will take Boeing six years to fill those orders and that is only if they do not get any more orders during that time. Management for Boeing needs to stress efficiency. They have made promises to increase production to 60 planes per month. Even at 60 planes per month that still leaves potential buyers waiting for quite a while and that could cause them to seek other international suppliers. Many buyers may go to Europe’s company Airbus or even try to newer companies such as Canada’s Bombardier according to AirGuide.
In 2000 the United States Congress passed the Wendel H. Ford Aviation Investment and Reform Act for the 21st century. The purpose of this bill was to create a competitive plan for new entrants entering the Airline Industry. It gives guidelines and requirements for existing airlines to allow new entrants a chance to get started in the business. Another name for the act is AIR-21, and the results for AIR-21 are significantly positive; by allowing one endpoint airports to decrease their price by 10%, and for both endpoints to decrease their price by 20%.
Some problems new entrants have when entering the Airline Industry, is operations and marketing. Marketing for a new airline can be difficult because of the loyal customers existing airlines already have. However, there are plenty of ways that airlines can increase their loyal customer base, with things such as frequent flyer miles, corporate incentive agreements, and travel agent commission overrides. For new entrants these would be considered a threat to entering the airline industry. Another threat to entering the airline industry is starting off with limited operating access.
These would include limited boarding gates, ticket counters, baggage handling, storage facilities, and take-off and landing slots. Even though it may seem like a great time for a new airline to open, with existing airlines cutting routes, and raising prices by seat, this would be a very hard industry to enter and have a success story. For an airline to see any profit right now while oil prices are higher than ever, they must be able to fly full planes at all times. Lately even existing airlines have failed to see a profit. For example, Virgin Airlines did not see a profit for five years after its first flight.
Even Warren E. Buffet was stated in a New York Times article that an investment in US Airways, in the early 1990’s, one of his biggest mistakes “Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down”. There are many risks entering the Airline Industry, but there are also many rewards if a new entrant were to have a success story. JetBlue reported profits of $1. 5 billion dollars last year, and its revenue at $192 billion dollars.
They opened in 2010, and they are now an international airline. At the end of 2011, JetBlue was reported to have an average of seven hundred flights a day. JetBlue is becoming more of a success story than most other new entrants. For a new airline to start up, they need to understand how their investment breaks down. Landing and associated airport charges makes up 4%, depreciation and amortization 7%, maintenance and overhaul 10%, fuel and oil 12%, flight crew 7%, enroute facility charges 2%, station expense 11%, passenger service 10%, ticketing, sales and promotion 16%, general administrative 12%, and the rest is miscellaneous.
The above information was given by The Airline Industry Trends, Challenges, and Strategies authored by Dr. John Wensveen. Dr. Wensveen noted that there have been twenty five airline failures since 2007. This is because of the global economic crisis in 2008; airlines were forced to increase their rates because of the high oil prices and the falling demand of people needing to fly. A SWOT Analysis for an airline would go as followed: Strengths: The AIR-21 act gives new airlines a chance to get started * The reward of having a successful airline is very big * Opening an airline is a Cost-Leadership strategy
Weaknesses: * The is a very big risk * Oil prices are high * It cost a lot of money to open a new airline * Loyalty systems other airlines have with their customers Opportunities * Being able to start something new * Opening up in an industry that will always be improving Threats * The US Airways merger with American Airlines * The United States Airlines Industry has the potential to become a monopoly with the merger of airlines * Not being able to move loyal customers to a new airline On February 14, American Airlines and US Airways publically announced their proposal to merge with one another.
Higher power executives and presidents in these 2 substantially large companies ensure that the soon-to-be merger will “lessen competition in the airline industry,” “provide the airline’s customers with a broader network, more choices, and better service” (Lawton). However, others do not agree. Many believe that because this newly merging company will be valued at $11 billion and will make-up a whopping 26% of U. S. market share, which would be the world’s largest airline, this will actually lead to an increase in fares (The Wall Street Journal).
Although the future of airfares is uncertain, it is safe to say that both companies are doing an excellent job in organizational communication during this transitional phase. US Airways and American Airlines are currently in a bumpy transitional phase in merging to become an airline powerhouse. US Airways and American Airlines must establish strategies to achieve common goals and develop this approach, which will require extensive mutual planning. Doug Parker, the former CEO of US Airways, will be taking the role as head of the new company, which will be taking the name in favor of American Airlines (Jones).
In a previous interview, Parker stated that “they’ve got some advantages in making the marriage go more smoothly. ” New management taking the reins of the new American must use a strategic approach to devise a long-term plan. In doing so, this strategic approach will be more beneficial than considering a short-term volatile schedule. There may be a large internal advantage to already having a sufficient amount of employees within the companies, but the public consumer will be more concerned about what disadvantages will affect them through external company decisions.
A conflicting potential impact of this merger is combining loyalty programs. Frequent flyers may certainly be an airlines most valued customer. But as their most valued customer, they should not reap harmful effects throughout the process of this combination. According to article American, US Airways Can Take Lessons from Other Airline Mergers the frequent flyer members of the “Aadvantage” rewards program will receive perks from both the US Airways program and American Airlines program. Although this is rational decision making: trying to smoothly overlay both reward programs to satisfy existing members, this rationality is bounded.
Because of this bounded rationality, decision making is limited because it would be impossible to add all reward benefits from both airlines into one blended program. For example, American Airlines members, who carry the Express Platinum Card and Black Card had unlimited access to first class lounges. When this merger is finalized, these card members will lose this privilege. (Jones) There may be some rough patches in aligning these airlines but the potential benefits will greatly outweigh the troubles that may be faced. Darryl Jenkins has said that “The financial deal is easy; the challenges are always in the integration. The new American must show sustainability for their firm to achieve long-term shareholder value. As of April 9th 2013, American Airlines (AAMRQ) closed with a stock price of $3. 58; US Airways (LLC) closed at a price of $15. 70 but dropped . 14 points throughout the course of the day (YAHOO Finance). Work Cited "Air France: Committed to Sustainable Development. " FINCHANNEL. com. The FINANCIAL, 4 Mar. 2013. Web. 08 Apr. 2013. <http://finchannel. com/news_flash/Travel_Biz_News/125695_Air_France%3A_committed_to_sustainable_development/>. Amstelveen. "Sustainable Development: Air France-KLM World Air Transport Leader in 2012. KLM Royal Dutch Airlines. KLM Corporate, 17 Sept. 2012. Web. 08 Apr. 2013. <http://nieuws. klm. com/sustainable-development-air-france-klm-world-air-transport-leader-in-2012-nl/>. Awal, Jamadil. "Oman Air, Airbus Bring 'little Engineer' Workshops Muscat. " Arab News. SAUDI RESEARCH & PUBLISHING COMPANY, 28 Mar. 2013. Web. 08 Apr. 2013. <http://arabnews. com/news/446279>. Business & Industry News - Aircraft Finance News. (2012). AirGuide Business, 1-16. Hawes, A. (2012, May 25). The Challenge of Starting an Airline. The New York Times.
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